WeeklyWatch – Landmark growth for Japan while growth dampens elsewhere

22^nd May 2023

Stock Take

Historic figures for Japan’s stock market

In the late 1980s, the ground beneath the Imperial Palace in Japan was said to be more valuable than the entire state of California. But the responding crash in asset prices after the bubble burst represented one of the biggest destructions of shareholder capital in stock market history.

After two decades of low growth and falling prices, the benchmark Nikkei 225 index rallied to its highest level since 1990 on Friday – as the G7 leaders gathered in Hiroshima. This comes after smashing through 30,000 earlier in the week, too. Strong corporate results, a weaker yen and an economy that’s starting to rebound after the pandemic are all to thank.

This optimism was boosted by the news that the world’s third-largest economy grew at an annualised rate of 1.6% between January and March – twice as fast as expected. Two straight quarters of contraction in the second half of 2022 was enough to lift the country out of recession.

Mounting signs of a slowdown in US, European and Chinese growth dampen the outlook for Japan’s export-reliant economy and only time will tell whether their current numbers can last. Some are also concerned that the Bank of Japan could be too slow in normalising its ultra-accommodative policy and risk inflation overshooting even further. Japan’s Consumer Price Index experienced a notable acceleration, reaching 3.5% and exceeding expectations by a considerable amount.

China’s industrial, retail and property markets are losing steam

With China’s wobbly post-COVID recovery, it wasn’t a surprise that their central bank kept interest rates on hold on Monday, but some monetary easing is likely in the coming months to support economic recovery.

On a positive note, China overtook Japan during the first quarter of the year to become the world’s biggest exporter of cars. They exported 1.07 million vehicles, which is up 58% compared with the first quarter of 2022.

This boost has been in no small part due to the rise in demand for electric vehicles, but it has also benefitted from trade sanctions imposed on Moscow by Western countries. Its market share in Russia has surged after rivals, including Volkswagen and Toyota, quit the country.

The G7 discuss further Russian sanctions

A major discussion at the G7 summit was the impact of Russian sanctions. Data confirms that eurozone economic growth advanced 1.3% year-on-year in the January–March period. The EU’s decision to halt most of its energy purchases from Moscow following the Ukraine invasion meant imports of Russian oil and gas to the region decreased by 72% compared to the previous year. The net trade balance of the region shifted to a surplus.

The EU’s trade deficit with China, the bloc’s second-largest trading partner after the US, also fell in the first quarter as it seeks to reduce its dependence on Beijing.

The future of interest rates in Europe and the US

Meanwhile, as inflation continues to run well over three times its 2% target, a Reuters poll of economists forecast the European Central Bank will hike interest rates by 0.25% at each of its next two meetings.

A similar poll suggested the US Federal Reserve will hold its key interest rate steady this year despite an expected recession. Solid retail sales figures for April boosted hopes that consumer spending will continue to support the economy as the delayed effects of the Fed’s policy tightening broaden out. It seems the Fed views a mild recession as an acceptable price for bringing inflation back down to target.

Wall Street stocks hit their highest level in nine months midweek, and global shares hit a one-month high as markets reflected increased hopes of a deal over the US debt ceiling. But US equities ended the week on a soft note as talks between the Democrats and Republicans broke down again, with no additional meeting set. Wrangling between the two political parties could take negotiations down to the wire or to a stop-gap agreement that kicks the can down the road until September.

Mark Dowding of BlueBay Asset Management commented:

“For now, financial markets remain relatively sanguine about the upcoming debt ceiling. It appears there is a widespread acknowledgement that, when all is said and done, the US Administration won’t possibly allow itself to default on its debts and wreak havoc on the global financial system. In a sense, having witnessed past skirmishes related to the debt ceiling, there is a sense of the story of the boy who cried wolf too many times.”

Wealth Check

You’ll always remember those life-changing moments: meeting your partner, the birth of your children, collecting the keys to your first home.

How about when you finally pay off your mortgage? Will you remember that?

Completing the repayments on your mortgage is a major personal achievement; you may have spent 25 years or more setting aside income, considering interest rates and calculating mortgage deals. And while this landmark may be less romantic than that first date, in many ways it’s no less life-changing.

Not only will you own outright what is probably your biggest asset, but you also will have access to a sizeable sum each month that previously was earmarked for your lender. And while it might be tempting to use this newfound cash on a holiday, a car or a home extension, it’s a golden opportunity to talk to an adviser to review your current budget, savings and retirement plans to see if you’re using it most effectively.

As with all financial planning, it’s never too early to start thinking about how to balance paying off your mortgage with saving for retirement. If, for example, you pay off your mortgage at 57 and work until you’re 66, you will have nine years of monthly savings to contribute towards your retirement.

And if that retirement is the long one to which we all aspire, those additional funds may be vital. If you are a 50-year-old man of average health today, the Office for National Statistics’ life expectancy calculator suggests you will live until the age of 84; if you are a 50-year-old woman with the same reasonable health, you are forecast to live until 87.

That would mean there are many years after retirement that will need to be funded – whether you’re just taking life a little easier, starting a brand-new business or fulfilling ambitions for travel, your family or other personal passions.

Now consider how the money freed up by paying off your mortgage can have an impact: if you save £500 per month after a mortgage term has expired, this will add up to £60,000 over 10 years. It could be worth more if you choose to invest it – and allowing for any tax relief on your contributions. If you do choose to invest, you could get back more or less than this.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The Last Word

“Our world is vast, but we are all in it together. And this is our shared cause – peace.”

Volodymyr Zelenskyy speaks at the G7 summit in Hiroshima.

BlueBay are a fund manager for St. James’s Place.

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SJP approved 22/05/2023